Imagine Jailing the Central Bankers Who Saved the World

The U.K. may be on the verge of an unprecedented experiment in public accountability. The courts may soon be invited to consider the following question: Should government officials face prosecution if the actions they took to support the financial system during the credit crisis stink in hindsight?

In late 2007 and early 2008, with markets in a meltdown and the health of British banks under relentless scrutiny, the Bank of England belatedly pumped money into the financial system. With money markets seized up and liquidity hard to find, banks were invited to trade assets for central bank cash.

At issue is whether officials nudged, steered or ordered -- take your pick -- financial firms to act in unison, ensuring that no single bank looked more desperate for assistance than its peers. In other words, were these transactions rigged?

Sir Paul Tucker, the former deputy governor of the Bank of England, was interviewed this year as part of an investigation by the Serious Fraud Office, the Financial Times reported this week. The department, which opened the probe in March 2015, will decide whether to pursue any charges by the end of the year, Bloomberg News reported at the start of August. The central bank has already conducted its own probe, handing its results to the SFO in November 2014.

The concerns that might have prompted Bank of England executives to micromanage the deals were outlined by former Governor Mervyn King in testimony to lawmakers in December 2007 (emphasis added):

A key lesson that central bankers around the world have taken from the recent turmoil is that in stressed conditions, any bank that is seen to come to the central bank to borrow, whether in regular standing facilities against high-quality collateral, or against wider collateral in a discount window or support operation, can become stigmatized in the market.

If officials were indeed guilty of effectively dictating how much money banks should ask for in an effort to stop the needy from being besmirched, should they face trial? Kit Juckes, the global strategist at Societe Generale in London, doesn’t think so. “Let things the battlefield surgeons did to keep the army alive remain unspoken,” he said in an exchange on Twitter with me this week. “Alternative too dreadful to think about.” Dan Davies, a senior research adviser at Frontline Analysts, agrees. “It’s a disproportionate amount of effort to put into a ‘crime’ that was not only victimless but socially useful,” he said in the same Twitter exchange.

Imagining the counterfactual -- the economic fallout had central bankers not acted -- is a powerful argument. I would contend, however, that the key issue isn’t whether officials manipulated the liquidity process; it’s the secrecy surrounding that injection.

Rather than faking an open auction for cash, the central bank could simply have allocated identical amounts to each institution, regardless of their size but ensuring that the amount of support was sufficient to bolster even the weakest institution, with the other recipients enjoying a harmless excess of funding. No secret deals, no under-the-table instructions, and no stigma.

The Bank of England, unfortunately, has something of a track record on trying to avoid transparency. When mortgage lender Northern Rock got into terminal trouble in September 2007, the central bank’s knee-jerk reaction was to attempt a secret bailout. “The Bank of England might have dealt with the situation by acting covertly as lender of last resort, without publishing it until the process had finished,” King later told lawmakers investigating the first run on a U.K. bank in more than a century. “That would have been my preferred course.” Lawyers, though, had advised King that a backdoor rescue would break European law.

Moreover, as the threat to the global financial system worsened, King found a way to secretly funnel 62 billion pounds ($76 billion) to Royal Bank of Scotland Group and HBOS in October 2008. Those covert loans were kept quiet for more than a month, and weren’t even revealed at the time they were made to members of the central bank’s monetary policy committee, former policymaker Danny Blanchflower revealed in a New Statesman magazine article in December 2009.

Then, there’s the not-inconsequential issue of whether Tucker instructed Barclays to lowball its money-market Libor submissions in 2008. Tucker denies it; former Chief Executive Officer Bob Diamond says it happened. But a recording or transcript of the key telephone call has never turned up. And there are former Barclays traders doing jail time for their parts in rigging Libor who might otherwise be free.

Tucker’s SFO interview wasn’t under caution, meaning he isn’t a suspect. The SFO may well decide that it isn’t in the public interest to pursue the matter. But if its investigations show that there is a case to be made, there should be no limit to how high up the U.K. financial management pyramid the investigation goes.

I have a lot of sympathy for any government official who was fighting fires during the financial crisis. At at the peak, the government’s support for the banking system meant taxpayers were on the hook for 1.3 trillion pounds ($1.6 trillion), equal to about half of an entire year of U.K. economic output. Royal Bank of Scotland remains a ward of the state, owned by U.K. taxpayers.

So it seems to me right and proper that officials should have their day in court to defend their actions publicly if they’re charged. In “Other People’s Money -- and How Bankers Use It,” American litigator Louis Brandeis explained why:

Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.

All too often in public life, it’s not the bad decision that trips people up, it’s the cover-up that follows. The circumstances under which public money was used to prop up private banks almost a decade ago need to be brought out into the daylight -- if only to ensure that the next crisis isn’t resolved in the shadows.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”